RECESSION & ITS DEFINITIONS:

Many professionals and experts around the world believe that a true economic recession can only be confirmed if GDP (Gross Domestic Product) growth is negative for a period of two or more consecutive quarters. In a 1975 New York Times article, economic statistician Julius Shiskin suggested several rules for identifying a recession, one of them is "two down quarters of GDP". The roots of a recession and its true starting point actually lies in the several quarters of positive but slow growth before the recession cycle really begins. Often in a mild recession the first quarter of negative growth is followed by slight positive growth, then negative growth returns and the recession trend continues. In time, the "two down quarters of GDP" were forgotten, and a recession is now often defined simply as a period when GDP falls (negative real economic growth) for at least two quarters. Some economists prefer a more healthy definition of a recession i.e 1.5% rise in unemployment within 12 months. The agency that is officially in charge of declaring a recession in the United States is known as the National Bureau of Economic Research, or NBER. The NBER define a recession as a significant decline in economic activity lasting more than a few months. In economics, a recession is a general slowdown in economic activity over a sustained period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes and business profits all fall during recessions. It is actually more common than you might realize for countries around the world to experience mild economic recessions. Recession (or contraction) is a natural result of the economic cycle and will adjust for changes in consumer spending and consumption or increasing and decreasing prices of goods and labor. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. .A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as an economic depression.

GLOBAL RECESSION:
There is no commonly accepted definition of a global recession, IMF regards periods when global growth is less than 3% to be global recessions. The IMF estimates that global recessions seem to occur over a cycle lasting between 8 and 10 years. Economists at the International Monetary Fund (IMF) state that a global recession would take a slowdown in global growth to three percent or less. By this measure, four periods since 1985 qualify: 19901993, 1998, 20012002 and 2008 2009.

GLOBAL RECESSION IN 2009:

According to the IMFs World Economic Outlook, October 8, 2008, the world economy is entering a major downturn in the face of the most dangerous shock to rich-country financial markets since the 1930s. IMF expects global growth to come down to 3% in 2009 measuring purchasing power parity. The World Bank said in December 2008 that the global economy will enter a recession for the first time since 1982. International trade will decline from 2007 levels. The bank said it expects global GDP growth to decline to 0.9% in 2009 from 2.5% in 2008. Any global growth rate under 2.0% is tantamount to a recession according to economist David H. Wang. Global trade is expected to decline 2.1% in 2009, the first decline since 1982, on reduced global demand and export credits. Apart from the decline in GDP, an economic recession is caused by a variety of factors such a slowdown in manufacturing activity, falling real estate and housing prices and a downward trend in business investment. Economic recession leads to rising unemployment resulting in weakening of the peoples spending power. The share prices decline and the stock market enters a bear phase. The National Bureau of Economic Research (NBER) defines recession as a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

DETERMINANTS OF AN ECONOMIC RECESSION

The few significant determinants of recession which impact on the economy are; The rate of job loss becomes far too alarming Many businesses across all sectors suffer a serious decline in sales turnover and their profits shrink Borrowers default on repayment of loans and credit card liabilities Banking system breaks down as borrowers are not in a position to repay loans Prices of food, fuel and other essential commodities shoot up Companies offer voluntary retirement programs to reduce their workforce and cut wages People foreclose their fixed-term deposits, and sell off other assets to meet their day-today expenses. Apart from some simple causes, there can also be a few complex reasons why economic recessions occur. One primary reason is when consumers lose interest and cease buying products. Prior to an economic recession, there will usually be an overproduction of goods causing supply to exceed the demand. This will drive companies to increase prices, which in turn causes consumers to lose confidence and decide to decrease spending. Certain events that harm specific industries could spur a recession, such as what is currently happening to the banking, credit and mortgage industries. Over consumption or excess buying may also be another reason for a recession. Spending more than what is necessary can lead to debt. Debt can affect the amount people have in savings and their disposable income. Wrong economic policies pursued by a government can have harmful effects. If not zealously monitored, these policies could cause the economy to boom and then bust and lead to inflation. The steadily increasing oil prices have a cascading effect and severely impacts the economy. When the policy makers do not pay attention and fail to address the increasing inflation at the beginning of a recession, more and more economic disasters follow and spread world wide. Over the years, economists have suggested a number of strategies to help an economy to recover from a recessionary phase. The strategy to be adopted may vary depending on the type of economic system followed by a nations policy makers. While some may favor deficit spending to

restart economic growth, others may recommend tax cuts and a few may prefer non-intervention by the government in the market forces of the economy.

Impact Of Recession on Different World Economies:

The rich worlds economies were either shrinking, or close to it, long before September. Recent weeks have made a rich-world recession all but inevitable. Americas economy lost steam throughout the summer. Temporarily sustained by fiscal stimulus and strong exports, output grew at a solid 2.8% annualised rate between April and June. But as the stimulus wore off, the job market worsened, credit tightened and consumer spending plunge. That slide became a rout in September. The economy lost 159,000 jobs, the most in a month since 2003. Car sales fell to a 16-year low as would-be buyers were unable to get credit. The economy may already have shrunk in the third quarter. The rest of the year is likely to be worse. Some economists expect consumer spending to fall at its fastest pace since the 1980 recession. Add in other gloomy evidence, such as a survey of purchasing managers that suggests manufacturing is extremely weak, and it is clear that output is now falling. Americas recession may not yet be official, but it is well under way. In Europe the outlook is equally grim. The British economy, which stalled in the second quarter, is now unmistakably falling into recession. The IMFs forecasts suggest that Britain will see the worst performance of any big economy in the year to the fourth quarter of 2008. The economies of the euro area, too, are struggling badly. Figures released on October 8th showed that output in the euro area fell at an annualised rate of 0.8% in the second quarter. GDP shrank in the currency zones three largest countriesGermany, France and Italy. The fourth largest, Spain, hardly grew. As in a different place, the most recent figures have grown grimmer still. Business confidence has turned down and a closely watched survey of purchasing managers points to a further contraction in activity over the summer months. Even the European economies that are less directly affected by housing busts, such as Germany, have been hard hit. The big hope for the euro area was that German shoppers, relatively free of debt and with scope to save a little less, would make up for weakness in debt-laden economies such as Spain. But household spending in Germany has been falling since the end of last year. Japan, too, is looking weak. Its economy shrank at an annualised rate of 3% in the second quarter as exports fell, investment slowed and high food and fuel prices dented consumer confidence.

Japanese banks are less involve in the financial crisis than those in Europe and America, but with other economies falling into recession and the yen soaring, the prospects for Japans exports and economy are dark. This gloomy backdrop explains why the co-ordinated rate cuts were so essential. Even without the financial seizure, the case for cheaper money was becoming abundantly clear. With commodity prices falling sharply (the price of a barrel of crude was down to $88 on October 8th) and economies suffering, inflation risks are evaporating in the rich world. If oil prices remain at around todays levels, headline inflation will be below 1% in America by next summer. Deflation is an increasing risk. That suggests more rate cuts will be needed, particularly in Europe. All told, the IMF expects the rich-world economies to grow by only 0.5% in 2009. Its forecast of 3% global growth depends on reasonably robust expansion in emerging economies. The fund expects developing countries, as a group, to grow by 6.1% in 2009, more slowly than their blistering 8% pace of recent years, but far from recession. That would imply an unprecedented growth gap between the rich and emerging world Some emerging economies, notably China, have shown remarkable elasticity to the financial storm . Many other markets, however, are being hit hard by the widening crisis as investors flee risk.

Impact Of Recession on Economy Of Pakistan:

The global recession that started in the fourth quarter of 2008 is expected to continue till mid2010. It has affected almost all countries and Pakistan is no exception. The world has not seen anything as serious in terms of an economic crisis as this since the Great Depression of 1929. Pakistan is actually a very economically diverse country, boasting industries of textiles, agriculture, sports goods, chemicals, food processing, and fishing, to name a few. We were, at one point, one of the top exporters of fish and shrimps to Europe. In 2005, the World Bank named Pakistan as the top reformer in the region; and by 2006 we had managed to decrease our poverty level by 21 %. The current global economic recession provides great opportunity to Pakistan for attracting investment as the country provides better chances of returns as compared to the Western and other countries of the world, Due to financial recession, there is negative trend in returns all over the world but very positive in Pakistan. This trend has enabled Pakistan to emerge as strong profit provider in terms of returns Pakistan provides 35 to 40 percent profit returns besides offering a

conducive atmosphere to invest in various sectors of economy. The investors are in search of safe and profitable markets and are afraid to invest in the countries facing financial recession, however, Pakistan was not directly hit by the recession, hence offering a promising opportunity for them. Economic experts believe that although the increasing prices of oil and edible commodities at international market affected Pakistan negatively, however, it was not directly hit by the financial recession as the other countries experienced. The investors have somewhat regained confidence in the Pakistani capital markets. In recent weeks, net investment by foreigners has been positive in the Karachi Stock Exchange. This trend is expected to continue in FY10 and we may see some growth in this fiscal year against a net outflow of $450m in FY09. This, however, is mainly dependent on the end to the war on terror in the first quarter of FY10. The regulations put in place by the State Bank of Pakistan over the last many years have helped Pakistan emerge out of this crisis relatively unscathed. No financial institution collapsed, unlike the banks in the US and Europe, and the government did not need to step in to buy shares of failing institutions. We did have a high percentage of write-offs in Pakistan but nothing compared to amounts that were written off in the US and Europe. However, Pakistan will continue to face challenges as long as the world remains in recession. How well the government in Islamabad manages its economy this fiscal year will determine the final outcome.